Trade creation, trade diversion, and the general equilibrium effects of regional trade agreements: a study of the European Community-Turkey customs union

This paper presents an industry-level analysis of trade flows in order to estimate the trade effects of Turkey's customs union with the European Community (EC). The paper is able to distinguish between trade creation and trade diversion by employing tariff data on each good to measure the impact of not only the tariff level but also the difference between tariffs applied to imports from Europe and the most-favored nation tariffs applied to imports from other non-preferential trading partners. The paper estimates the general equilibrium effects of the customs union in addition to the effects of eliminating tariffs on the EC's exports to Turkey. It concludes that the customs union has generated more than twice as much trade creation as trade diversion but that the overall impact of the customs union has been relatively small.